KARACHI (October 31 2006): The Board of Directors of the Karachi Stock Exchange (KSE) has approved the VAR (value at risk) - the new risk management system that is going to be implemented from November 6. The approval was given in the Annual General Meeting held here on Monday.

The meeting approved the minutes of the last meeting held on September 29, 2006, in which it was decided that from November 6, 2006.

THE FOLLOWING WILL BE IMPLEMENTED:

a. New netting regime (except for client level netting, which shall be implemented from February 1, 2007.

b. New VAR (Value at Risk) based margin regime.

c. New VAR-based haircut regime.

d. All In-house badla will be banned.

A detailed presentation in this regard would be given to the KSE members on Tuesday so that they would understand the working of new risk management system and operate it efficiently.

The board also approved name of top 25 companies for the awards for 2004-05 and okayed that the KSE would invite Prime Minister Shaukat Aziz to present the awards. The event is expected to be held between November 15 and the first week of December, according to the availability the chief guest.

The KSE set December 31, 2006, for demutualisation of the exchange as part of reform process and to run it on international professional lines and the next step is the corporatisation, whereby KSE, presently a company limited by guarantee, will be converted into a company limited by shares and 100 percent of its shares will be issued to its members.

Subsequently, the members would be required to disinvest 40 percent of their shareholding to financial institutions and 20 percent to general public by having the Exchange listed locally or globally.

Moreover, through insertion of a new section 32E in the Securities & Exchange Ordinance, 1969 by virtue of Finance Bill 2006-07, it has been envisaged that the stock exchanges shall stand corporatised and demutualised by December 31, 2006 or from a later date as may be permitted by the Commission.

Introduction of Cash Settled Stock Futures Contracts is in process, which will be implemented soon and in order to provide definite and continuous liquidity to the market in a transparent manner and to minimise the associated risks and inequalities the SECP has proposed a new leverage product called CFS MK II.

A committee constituted by the SECP comprising all the stakeholders, including the KSE, has already completed its deliberations and submitted its recommendations.

In the meantime, the SECP, as an interim arrangement, has enhanced CFS cap to Rs 55 billion besides increasing the number of eligible scrips, banning of 'Badla' (in-house financing) and strengthening various risk management measures.

As reported in the last year's review, a preliminary report, identifying the various issues and recommendations thereon in line with the international practices, along with Valuation Report on the net worth of the Exchange and its Business Plan had been submitted to the SECP. It was followed by a detailed meeting of the Demutualisation Committee with the Chairman-SECP on November 30, 2005.

On January 28, 2006, a Memorandum of Understanding was signed between SECP & KSE for demutualization of KSE, whereby amongst other conditions, the valuation of the KSE is to be carried out by an international investment banker, the appointment of which is in process.

The corporatisation and demutualisation of the Exchange would be a major step forward in the reform process and is expected to add significantly to the credibility, efficiency and growth prospects of the KSE. The first big step in this exercise is to complete the valuation of the Exchange by a globally-renowned consultant. The appointment of the consultant is now imminent.

Strengthen the organisational capability of the Exchange by developing and motivating the existing human resources and by inducting new employees with new skill sets. It is expected that the strengthened organisation will significantly add to market surveillance, risk management and new product development capacity of the Exchange.

Introduction of new risk management measures which are under active consideration pose an appreciable challenge. The new measures will significantly transform stock trading practices in the Exchange.

Copyright Business Recorder, 2006